Use the Information for the Question(s)below

question 19

Multiple Choice

Use the information for the question(s) below.
Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing.The pilot production and test marketing phase will last for one year and cost $500,000.Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike.If the test-marketing phase is successful,then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after-tax cash flows of $400,000 in perpetuity beginning in year two.If the test marketing is not successful,Kinston can still go ahead and build the new plant,but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two.Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000.Kinston's cost of capital is 10%.
-Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately.Assuming that the probability of high or low demand is still 50%,the NPV of the Kinston Industries Mountain Bike Project is closest to:

• A)$0.
• B)$90,000.
• C)-$45,000.
• D)$1,000,000.

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Definitions:

Gasoline Prices

The cost per unit of gasoline, determined by various factors including crude oil prices, taxes, supply and demand, and refining costs.

Efficiency

The extent to which resources are used in the best way possible to produce goods and services, minimizing waste and costs.

Shortages

A situation where the demand for a product exceeds its supply at a particular price, often leading to increased prices.

Price Floor

Price floor is a government or regulatory imposed minimum price set above the equilibrium price, preventing the market price from falling below a certain level.